Liquidity

Liquidity refers to the ease with which an Asset can be converted into cash without significantly affecting its market price. It is a measure of how quickly and easily an Asset can be sold or purchased in the market.

High liquidity means an Asset can be quickly sold for cash, while low liquidity indicates that it may take longer to sell and could require a discount to do so.

Examples:

  • Cash: The most liquid Asset, as it can be used immediately for transactions.
  • Stocks: Generally considered liquid, as they can often be sold quickly on Stock exchanges.
  • Real Estate: Typically less liquid, as selling property can take time and may require significant negotiation.
  • Collectibles: Often low liquidity, as finding a buyer willing to pay the desired price can be challenging.

Cases:

  • During a financial crisis, even normally liquid Assets like Stocks can become illiquid if many investors try to sell at once, leading to falling prices.
  • A business may maintain a higher level of cash reserves to ensure liquidity, allowing it to meet short-term obligations.